Don’t need rising rates for lower home prices- rising age may be enough

This spring we are noticing a pattern: high-end housing is going up for sale. In clusters all around us.

On our short lake front street in an old, established end of the city, there are now 9 properties for sale out of maybe 35 houses. In 20 years, I have never seen this many homes for sale on our street. Yesterday as we drove further east to visit a friend, we could not help but notice that this spring about every third property over the 5km stretch now has For Sale signs. It is actually a little surreal. What in the world? Mortgage rates are the lowest ever in our lifetime. Unemployment rates are so far still historically low…

But then we remembered the pattern of North American birth rates, as reflected in this picture of US birth rates below. (source: US Birth rates)

Rising education levels in women and birth control in North America, have made birth rates today much lower than in 1909. They fell dramatically into the depression of the 1930’s. They rebounded after the Second World War and have been on a downtrend ever since. All those babies born during the boom time (in red) are now between the ages of 52 and 69. And once more, they are proving a dominant economic force. Only this time, the force they are exerting is mostly deflationary rather than inflationary.

An estimated 84% of baby boomers own their home, and thanks to trade ups over the years, the properties they own are among the most expensive on the market. Most are debt-financed, with 68% of boomers now saying they expect to carry mortgage debt into retirement. (See: Retirement time bomb: mortgage debt). In fact baby boomers have the distinction of being the most asset rich and indebted of any previous 50+ generation in history.

Most are also now living in some of the largest, most expensive to maintain housing in modern history with the highest property taxes, utility and maintenance bills the masses have ever experienced. At the same time, many are trying to assist their struggling kids who are paying the highest education costs of all time.

Even the tiny minority who are not indebted, and have amassed significant retirement savings, are still facing the lowest yields (interest and dividend income) in more than a century. A million dollar portfolio that historically produced 50k a year of appropriately low risk retirement income, now yields maybe 30K/year with much higher capital risk.

No wonder that boomers are now putting their high-priced properties up for sale.

Boomers are moving as a pack once more; not so much by calculated choice, but as a natural response to advancing age and the economic facts before them. Boomers have been asset rich and cash light for years. Now they crave the opposite: they want higher liquidity and lower upkeep and financial stress. 40% report they are worried about running out of money in retirement. Many more should be concerned but they just haven’t understood their math yet.

With so many aging and over-housed owners wanting to downsize at once, one has to ask: who can buy? With the smaller, age 20 to 4o cohort, still struggling to start careers and pay down debts, it is difficult to take on payments for even the lowest, entry-level property in many markets today. Taking the abundance of up-market properties off downsizing boomers at current prices, is virtually impossible to imagine.

In the end markets are driven by supply and demand. For all those arguing we would need higher mortgage rates to weaken demand before prices stumble, I suggest there is another route. A surge in supply brought on by a steady stream of aging sellers might itself be enough to trigger the long overdue mean reversion in prices. And if my age 50+ neighborhood is reflective of others (and it is), the downsizing exodus has already begun.

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